GLADSTONE COMMERCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2021. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. All references to “we,” “our,” “us” and the “Company” in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where otherwise noted or where the context indicates that the term means only Gladstone Commercial Corporation. General We are an externally-advised real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning, and managing primarily office and industrial properties. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies, many of which are corporations that do not have publicly-rated debt. We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately seven to 15 years and contractual rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment. All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. As of November 7, 2022: • we owned 137 properties totaling 17.2 million square feet of rentable space, located in 27 states; • our occupancy rate was 96.3%; • the weighted average remaining term of our mortgage debt was 4.3 years and the weighted average interest rate was 4.21%; and • the average remaining lease term of the portfolio was 7.1 years. 26 Table of Contents Business Environment Since the onset of the COVID-19 pandemic in March 2020, authorities throughout the United States and the world have implemented widespread measures attempting to contain its spread and impact, such as travel restrictions, quarantines, the promotion of social distancing and limitations on business activity. Generally, year to date 2022 has seen the lifting of most restrictive measures that were implemented during 2020 and 2021. These measures, and the pandemic generally, have caused significant national and global economic disruption, including disrupted business operations, including those of some of our tenants, and continue to have an adverse effect on demand for office space in the short term, including office utilization rates. Economic recovery in the United States and various other regions of the world has continued, but may be threatened by the further adverse effects of COVID-19 and more significantly by continuing inflationary conditions, rising interest rates and the impact of ongoing or escalated geopolitical tensions and conflict. The demand for industrial space has remained strong due to the continuing growth of e-commerce and reshoring of manufacturing operations, but appears to be only partially counterbalancing the adverse effects of COVID-19 on the commercial real estate industry. However, product delivery delays caused by supply chain disruption, and the apparent national labor shortage, have resulted in inflation and higher costs for both industrial and office construction projects. Industrial absorption increased on a nominal basis in 2021, compared to 2020, according to research reports, and continues to be strong through the first quarter of 2022, averaging approximately 130 million square feet of absorption each quarter. Construction activity for the industrial sector remains strong, as year-end 2021 estimates have approximately 500 million square feet of properties under construction with over 30% of that space pre-leased. Research reports also reflect that the office sector experienced negative absorption for each of the previous four quarters. Office space available for sublease has increased and is placing downward pressure on office rental rates. Interest rates remain volatile in response to competing concerns about inflationary pressures and the spread and effect of COVID-19 variants, coupled with the threat of a near-term recession. The yield on the 10-year US Treasury Note has increased significantly during the first half of 2022 to approximately 3%, which adversely affects interest rates on long-term financing. After completing the 12th year of the current cycle, some national research firms are estimating that both pricing and investment sales volume would be peaking and the national economy would be slowing in the near term. Global recessionary conditions may occur over the next 24 months caused in part by inflation, the ongoing COVID-19 pandemic, and geopolitical conditions, although the actual timeline, impact and duration are unknown. From a more macro-economic perspective, there continue to be significant uncertainties associated with the current economic environment and increasing probability of near-term recession. Other Business Environment Considerations The short-term and long-term economic implications are unknown, in relation to recent world events, including inflation, supply chain disruptions, labor shortages, rapidly rising interest rates, long term impact of the COVID-19 pandemic and associated government response in addition to any subsequent shift in policy, geopolitical conditions, new regulations or the long-term impact of social and infrastructure spending and tax reform in the U.S. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term, as well as other geopolitical issues relating to the global economic slowdown has increased domestic and global instability. These developments could cause interest rates and borrowing costs to be volatile, which may adversely affect our ability to access both the equity and debt markets and could have an adverse impact on our tenants as well. The majority of our variable rate debt is based upon the Secured Overnight Financing Rate (“SOFR”), although we have some variable rate mortgages based on the one-month London Interbank Offered Rate (“LIBOR”), which include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist. LIBOR is currently anticipated to be phased out by June 2023 and is expected to transition to SOFR, which incorporates repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition as SOFR becomes the standard benchmark for variable rate debt. During the transition further changes or reforms to the determination of supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based debt, or the value of our portfolio of LIBOR-indexed, floating-rate debt. We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have seven partially vacant buildings and three fully vacant buildings. There are no outstanding COVID-19 related rent modifications in place. 27 Table of Contents Our available vacant space at September 30, 2022 represents 3.1% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $3.8 million . We continue to actively seek new tenants for these properties. We believe our lease expiration schedule for the remainder of 2 022 is quite manageable, as it equates to only 2.7% of our lease revenue at September 30, 2022 . Property acquisitions since the beginning of 2019 have totaled $455.4 million and all transactions were industrial in nature, with a weighted average lease term of 12.9 years and a current weighted average lease term today of 10.8 years. Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our $125.0 million senior unsecured revolving credit facility (“Revolver”), with KeyBank National Association (“KeyBank”), which matures in August 2026, our $160.0 million term loan facility (“Term Loan A”), which matures in August 2027, our $60.0 million term loan facility (“Term Loan B”), which matures in February 2026, and our $150.0 million term loan facility (“Term Loan C”) which matures in February 2028. We refer to the Revolver, Term Loan A, Term Loan B and Term Loan C collectively herein as the Credit Facility. While lenders’ credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market (“CMBS”), to issue mortgages to finance our real estate activities. Recent Developments Sale Activity During the nine months ended September 30, 2022 we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available, and use the sales proceeds to acquire properties in our target, secondary growth markets, or pay down outstanding debt. During the nine months ended September 30, 2022, we sold three non-core properties, located in Jupiter, Florida, Parsippany, New Jersey, and Boston Heights, Ohio. Aggregate Square Footage Sold Aggregate Sales Price Aggregate Sales Costs Aggregate Impairment Charge for the Nine Months Ended September 30, 2022 Aggregate Gain on Sale of Real Estate, net 145,111 $ 28,000 $ 1,153 $ 1,374 $ 8,902 On October 28, 2022, we sold one of our properties in Columbus, Ohio for $2.3 million, resulting in a gain on sale, net, of $0.02 million. Acquisition Activity During the nine months ended September 30, 2022, we acquired 11 industrial properties located in Wilkesboro, North Carolina, Oklahoma City, Oklahoma, Cleveland, Ohio, Fort Payne, Alabama, Wilmington, North Carolina, Bridgeton, New Jersey, Vineland, New Jersey, and Jacksonville, Florida which are summarized below (dollars in thousands): Aggregate Square Footage Weighted Average Remaining Lease Term at Time of Acquisition Aggregate Purchase Price Aggregate Capitalized Acquisition Expenses Aggregate Annualized GAAP Fixed Lease Payments Aggregate Debt Issued 1,105,006 13.8 years $ 98,276 $ 776 $ 6,722 $ 41,313 On October 26, 2022, we purchased a 68,674 square foot industrial property in Denver, Colorado for $12.0 million. This property is fully leased to 1.00 tenant on a 20.0 year lease. 28 Table of Contents Leasing Activity During and subsequent to the nine months ended September 30, 2022, we executed nine leases, which are summarized below (dollars in thousands): Aggregate Square Footage Weighted Average Remaining Lease Term Aggregate Annualized GAAP Fixed Lease Payments Aggregate Tenant Improvement Aggregate Leasing Commissions 501,501 8.1 years $ 5,744 $ 5,670 $ 2,029 On October 12, 2022, we executed a lease amendment at our Egg Harbor, New Jersey property to extend the lease term an additional 2.0 years. On October 31, 2022, we executed a lease for 20,682 square feet of vacant space in our Mason, Ohio property for 7.3 years, bringing the property to full occupancy. During the nine months ended September 30, 2022, we had two lease terminations, which are summarized below (dollars in thousands): Aggregate Square Footage Reduced Aggregate Accelerated Rent Aggregate Accelerated Rent Recognized through September 30, 2022 216,095 $ 5,888 $ 5,175 Financing Activity During the nine months ended September 30, 2022, we repaid 13 mortgages, collateralized by 27 properties, which are summarized in the table below (dollars in thousands): Aggregate Fixed Rate Debt Repaid Weighted Average Interest Rate on Fixed Rate Debt Repaid $ 97,843 4.75 % Aggregate Variable Rate Debt Repaid Weighted Average Interest Rate on Variable Rate Debt Repaid $ 30,336 LIBOR/SOFR + 2.50% (1) (1) As of September 30, 2022, Secured Overnight Financing Rate (“SOFR”) was approximately 2.98%. During the nine months ended September 30, 2022, we issued five mortgages, collateralized by 10 properties, which are summarized in the table below (dollars in thousands): Aggregate Fixed Rate Debt Issued Weighted Average Interest Rate on Fixed Rate Debt $ 41,313 (1) 4.39 % (1) We issued $10.0 million of fixed rate debt in connection with the two-property portfolio acquired on May 4, 2022 with a maturity date of May 4, 2027. The interest rate is fixed at 4.00%. We issued $10.0 million of fixed rate debt with a maturity date of June 1, 2032, in connection with the three-property acquisition on May 12, 2022. The interest rate is fixed at 3.40%. We issued $16.9 million of fixed rate debt with a maturity date of August 1, 2027, in connection with the two-property acquisition on August 5, 2022. The interest rate is fixed at 4.95%. We issued $4.4 million of swapped to fixed rate debt with a maturity date of September 16, 2029, in connection with the property acquisition on September 16, 2022. The interest rate is swapped to a fixed rate of 5.39%. 29 Table of Contents Variable Rate Debt Issued Interest Rate on Variable Rate Debt $ 15,000 (1) SOFR + 2.50% (1) We issued $15.0 million of variable rate debt in connection with refinancing mortgage debt at two properties with a new maturity date of April 27, 2024 and interest rate of SOFR plus 2.50%. On October 26, 2022, we issued $6.6 million of swapped to fixed rate debt in connection with property acquisition on the same date, with a term of 6.9 years and interest rate swapped to 5.90%. During the nine months ended September 30, 2022, we extended the maturity date of three mortgages, collateralized by five properties, which is summarized in the table below (dollars in thousands): Aggregate Fixed Rate Debt Extended Weighted Average Interest Rate on Fixed Rate Debt Extended Extension Term $ 14,633 5.41 % 1.0 year Variable Rate Debt Extended Interest Rate on Variable Rate Debt Extended Extension Term $ 7,059 LIBOR + 2.75% 1.0 year On August 18, 2022, we amended, extended and upsized our Credit Facility, increasing our Revolver from $100.0 million to $120.0 million (and its term to August 2026), adding the new $140.0 million Term Loan C, decreasing the principal balance of Term Loan B to $60.0 million and extending the maturity date of Term Loan A to August 2027. Term Loan C has a maturity date of February 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. On September 27, 2022 we further increased the Revolver to $125.0 million and Term Loan C to $150.0 million, as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates from 3.15% to 3.75%. We incurred fees of approximately $4.2 million in connection with extending and upsizing our Credit Facility. As of September 30, 2022, there was $150.0 million outstanding under Term Loan C, and we used all net proceeds to repay all outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility’s current bank syndicate is comprised of KeyBank, Fifth Third Bank, The Huntington National Bank, Bank of America, Synovus Bank, United Bank, First Financial Bank, and S&T Bank. Equity Activities Common Stock ATM Program During the nine months ended September 30, 2022, we sold 2.0 million shares of common stock, raising $40.6 million in net proceeds under our At-the-Market Equity Offering Sales Agreements (the “Common Stock Sales Agreement”) with sales agents Robert W. Baird & Co. Incorporated, Goldman Sachs & Co. LLC, Stifel, Nicolaus & Company, Incorporated, BTIG, LLC, and Fifth Third Securities, Inc. On February 22, 2022, we entered into Amendment No. 1 to our Common Stock Sales Agreement. The amendment permits shares of common stock to be issued pursuant to the Common Stock Sales Agreement under the Company’s Registration Statement on Form S-3 (File No. 333-236143) and future registration statements on Form S-3 (the “Common Stock ATM Program”). As of September 30, 2022, we had remaining capacity to sell up to $26.5 million of common stock pursuant to the Common Stock ATM Program under the 2020 Universal Shelf (as defined below). Universal Shelf Registration Statement On January 29, 2020, we filed a universal registration statement on Form S-3, File No. 333-236143 (the “2020 Universal Shelf”). The 2020 Universal Shelf was declared effective on February 11, 2020. The 2020 Universal Shelf allows us to issue up to $800.0 million of securities. Of the $800.0 million of available capacity under our 2020 Universal Shelf, approximately $636.5 million is reserved for the sale of our 6.00% Series F Cumulative Redeemable Preferred Stock, par value $0.001 per share (the “Series F Preferred Stock”) and $63.0 million is reserved for our Common Stock ATM Program. As of September 30, 2022, we had the ability to issue up to $648.6 million of securities under the 2020 Universal Shelf. Series F Preferred Stock 30 Table of Contents On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of our authorized and unissued shares of Common Stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. We sold 164,400 shares of our Series F Preferred Stock, raising $3.7 million in net proceeds during the three and nine months ended September 30, 2022. As of September 30, 2022, we had remaining capacity to sell up to $621.6 million of Series F Preferred Stock. Non-controlling Interest in Operating Partnership As of September 30, 2022 and December 31, 2021, we owned approximately 99.0% and 99.3%, re spectively, of the outstanding operating partnership units in the Operating Partnership (“OP Units”). On September 20, 2022 , we issued 134,474 OP Units as partial consideration to acquire our 49,375 square foot property located in Fort Payne, Alabama for $5.6 million . During the nine months ended September 30, 2021, we redeemed 246,039 OP Units for an equivalent amount of common stock. As of September 30, 2022 and December 31, 2021, there were 391,468 and 256,994 outstanding OP Units held by holders who do not control the Operating Partnership (“Non-controlling OP Unitholders”), respectively. Diversity of Our Portfolio Gladstone Management Corporation, a Delaware corporation (our “Adviser”), seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the nine months ended September 30, 2022, our largest tenant comprised only 3.9% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Industry Classification Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Telecommunications $ 5,859 14.7 $ 5,815 16.7 $ 17,216 15.6 $ 16,978 16.8 Automotive 4,815 12.1 3,392 9.9 14,085 12.6 8,845 8.6 Diversified/Conglomerate Services 4,248 10.7 4,631 13.5 13,338 11.9 14,148 13.8 Healthcare 4,025 10.1 3,786 11.0 12,084 10.8 11,720 11.4 Banking 5,726 14.4 2,597 7.6 10,941 9.8 7,713 7.5 Diversified/Conglomerate Manufacturing 2,779 7.0 1,866 5.4 8,198 7.3 5,748 5.6 Buildings and Real Estate 2,317 5.8 2,331 6.8 6,976 6.2 6,968 6.8 Personal, Food & Miscellaneous Services 1,809 4.5 1,540 4.5 4,906 4.4 5,552 5.4 Beverage, Food & Tobacco 1,430 3.6 1,497 4.4 4,216 3.8 4,450 4.3 Personal & Non-Durable Consumer Products 1,669 4.2 617 1.8 3,634 3.3 1,852 1.8 Chemicals, Plastics & Rubber 1,208 3.0 1,208 3.5 3,619 3.2 3,499 3.4 Machinery 995 2.5 970 2.8 2,944 2.6 2,991 2.9 Containers, Packaging & Glass 971 2.4 777 2.3 2,850 2.6 1,985 1.9 Information Technology 669 1.7 1,673 4.9 2,824 2.5 5,011 4.9 Childcare 573 1.4 573 1.7 1,718 1.5 1,718 1.7 Printing & Publishing 229 0.6 571 1.7 688 0.6 1,439 1.4 Education 204 0.5 203 0.6 611 0.5 606 0.6 Electronics 185 0.5 166 0.5 546 0.5 796 0.8 Home & Office Furnishings 123 0.3 121 0.4 370 0.3 362 0.4 Total $ 39,834 100.0 % $ 34,334 100.0 % $ 111,764 100.0 % $ 102,381 100.0 % 31 Table of Contents The tables below reflect the breakdown of total lease revenue by state for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): State Lease Revenue for the three months ended September 30, 2022 Percentage of Lease Revenue Number of Leases for the three months ended September 30, 2022 Lease Revenue for the three months ended September 30, 2021 Percentage of Lease Revenue Number of Leases for the three months ended September 30, 2021 Texas $ 5,452 13.7 % 15 $ 3,801 11.1 % 15 New Jersey 4,271 10.7 4 756 2.2 4 Florida 3,775 9.5 9 4,191 12.2 10 Pennsylvania 3,707 9.3 10 3,807 11.1 10 Ohio 3,381 8.5 15 3,671 10.7 15 Georgia 2,894 7.3 10 2,757 8.0 9 North Carolina 2,320 5.8 10 1,604 4.7 7 Alabama 1,933 4.9 7 1,634 4.8 5 South Carolina 1,719 4.3 2 1,408 4.1 2 Michigan 1,608 4.0 6 1,609 4.7 6 All Other States 8,774 22.0 48 9,096 26.4 48 Total $ 39,834 100.0 % 136 $ 34,334 100.0 % 131 State Lease Revenue for the nine months ended September 30, 2022 % of Lease Revenue Number of Leases for the nine months ended September 30, 2022 Lease Revenue for the nine months ended September 30, 2021 % of Lease Revenue Number of Leases for the nine months ended September 30, 2021 Texas $ 15,971 14.3 % 15 $ 11,232 11.0 % 15 Florida 12,242 11.0 9 12,614 12.3 10 Pennsylvania 11,145 10.0 10 11,409 11.1 10 Ohio 10,517 9.4 15 11,284 11.0 15 Georgia 8,749 7.8 10 8,167 8.0 9 North Carolina 6,354 5.7 10 5,084 5.0 7 New Jersey 5,772 5.2 4 2,259 2.2 4 Alabama 5,254 4.7 7 4,911 4.8 5 Michigan 4,825 4.3 6 4,765 4.7 6 South Carolina 4,530 4.2 2 4,162 4.1 2 All Other States 26,405 23.4 48 26,494 25.8 48 $ 111,764 100.0 % 136 $ 102,381 100.0 % 131 Our Adviser and Administrator Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser and Gladstone Administration, LLC, a Delaware limited liability company (our “Administrator”) are controlled by Mr. David Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr. Terry Lee Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr. Arthur “Buzz” Cooper, our president, also serves as executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary, Michael LiCalsi (who also serves as our Administrator’s president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs. Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly-traded REIT that primarily invests in farmland. With the exception of Mr. Gary Gerson, our chief financial officer, Mr. Jay Beckhorn, our treasurer, and Mr. Cooper, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception of Mr. Cooper and Mr. Gerson, all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone 32 Table of Contents Land Corporation. Mr. Cooper and Mr. Gerson do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private. Advisory and Administration Agreements We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. We have entered into an advisory agreement with our Adviser, as amended from time to time (the “Advisory Agreement”), and an administration agreement with our Administrator (the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors’ and officers’ insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser each July. During its July 2022 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2023. Base Management Fee On July 14, 2020, we amended and restated the previous Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between us and the Adviser (the “Sixth Amended Advisory Agreement”). The Sixth Amended Advisory Agreement replaced the previous calculation of the base management fee with a calculation based on Gross Tangible Real Estate. The revised base management fee will be payable quarterly in arrears and calculated at an annual rate of 0.425% (0.10625% per quarter) of the prior calendar quarter’s “Gross Tangible Real Estate,” defined in the Sixth Amended Advisory Agreement as the current gross value of our property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any subsequent capital improvements thereon). The calculations of the other fees in the Amended Agreement remain unchanged. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. Incentive Fee Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net (loss) income (attributable) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net (loss) income (attributable) available to common stockholders for the period, and one-time events pursuant to changes in GAAP. The Incentive Fee is used by the Adviser primarily for performance-based compensation related to certain of its employees. 33 Table of Contents Capital Gain Fee Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2022 or 2021. Termination Fee The Advisory Agreement includes a termination fee clause whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the agreement after the Company has defaulted and applicable cure periods have expired. The agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions of the agreement, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds. Administration Agreement Under the terms of the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the appropriate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. Significant Accounting Policies and Estimates The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, filed by us with the U.S. Securities and Exchange Commission (the “SEC”) on February 15, 2022 (our “2021 Form 10-K”). There were no material changes to our critical accounting policies or estimates during the nine months ended September 30, 2022. Results of Operations The weighted average yield on our total portfolio, which was 7.8% and 7.9% as of September 30, 2022 and 2021, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties. 34 Table of Contents A comparison of our operating results for the three and nine months ended September 30, 2022 and 2021 is below (dollars in thousands, except per share amounts) : For the three months ended September 30, 2022 2021 $ Change % Change Operating revenues Lease revenue $ 39,834 $ 34,334 $ 5,500 16.0 % Total operating revenues $ 39,834 $ 34,334 $ 5,500 16.0 % Operating expenses Depreciation and amortization $ 15,764 $ 14,760 $ 1,004 6.8 % Property operating expenses 6,536 6,807 (271) (4.0) % Base management fee 1,603 1,472 131 8.9 % Incentive fee 1,513 1,266 247 19.5 % Administration fee 481 382 99 25.9 % General and administrative 833 811 22 2.7 % Impairment charge 10,718 — 10,718 100.0 % Total operating expenses $ 37,448 $ 25,498 $ 11,950 46.9 % Other (expense) income Interest expense $ (9,107) $ (6,688) $ (2,419) 36.2 % Gain on sale of real estate, net 8,902 — 8,902 100.0 % Other income 316 2,350 (2,034) (86.6) % Total other expense, net $ 111 $ (4,338) $ 4,449 (102.6) % Net income $ 2,497 $ 4,498 $ (2,001) (44.5) % Distributions attributable to Series D, E, F, and G preferred stock (2,987) (2,868) (119) 4.1 % Distributions attributable to senior common stock (114) (170) 56 (32.9) % Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (604) $ 1,460 $ (2,064) (141.4) % Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted $ (0.02) $ 0.04 $ (0.06) (150.0) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 16,976 $ 16,220 $ 756 4.7 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 17,090 $ 16,390 $ 700 4.3 % FFO per weighted average share of common stock and Non-controlling OP Units - basic (1) $ 0.43 $ 0.44 $ (0.01) (2.3) % FFO per weighted average share of common stock and Non-controlling OP Units - diluted (1) $ 0.43 $ 0.44 $ (0.01) (2.3) % FFO per weighted average share of common stock and Non-controlling OP Units - diluted, as adjusted for comparability (1) $ 0.43 $ 0.44 $ (0.01) (2.3) % (1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO and FFO adjusted for comparability. 35 Table of Contents For the nine months ended September 30, 2022 2021 $ Change % Change Operating revenues Lease revenue $ 111,764 $ 102,381 $ 9,383 9.2 % Total operating revenues $ 111,764 $ 102,381 $ 9,383 9.2 % Operating expenses Depreciation and amortization $ 45,672 $ 45,661 $ 11 — % Property operating expenses 20,118 20,278 (160) (0.8) % Base management fee 4,727 4,369 358 8.2 % Incentive fee 4,193 3,540 653 18.4 % Administration fee 1,342 1,016 326 32.1 % General and administrative 2,788 2,540 248 9.8 % Impairment charge 12,092 — 12,092 100.0 % Total operating expense before incentive fee waiver $ 90,932 $ 77,404 $ 13,528 17.5 % Incentive fee waiver — (16) 16 (100.0) % Total operating expenses $ 90,932 $ 77,388 $ 13,544 17.5 % Other (expense) income Interest expense $ (22,813) $ (20,338) $ (2,475) 12.2 % Gain (loss) on sale of real estate, net 8,902 (882) 9,784 (1,109.3) % Other income 538 2,884 (2,346) (81.3) % Total other expense, net $ (13,373) $ (18,336) $ 4,963 (27.1) % Net income $ 7,459 $ 6,657 $ 802 12.0 % Distributions attributable to Series D, E, F, and G preferred stock (8,900) (8,571) (329) 3.8 % Series D preferred stock offering costs write off — (2,141) 2,141 (100.0) % Distributions attributable to senior common stock (344) (534) 190 (35.6) % Loss on extinguishment of Series F preferred stock (5) — (5) 100.0 % Net loss attributable to common stockholders and Non-controlling OP Unitholders $ (1,790) $ (4,589) $ 2,799 (61.0) % Net loss attributable to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted $ (0.05) $ (0.13) $ 0.08 (61.5) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 47,072 $ 41,954 $ 5,118 12.2 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 47,416 $ 42,488 $ 4,928 11.6 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted, as adjusted for comparability (1) $ 47,416 $ 44,629 $ 2,787 6.2 % FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1) $ 1.21 $ 1.15 $ 0.06 5.2 % FFO per weighted average share of common stock and Non-controlling OP Unit - diluted (1) $ 1.21 $ 1.14 $ 0.07 6.1 % FFO per weighted average share of common stock and Non-controlling OP Unit - diluted, as adjusted for comparability (1) $ 1.21 $ 1.20 $ 0.01 0.8 % (1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO and FFO adjusted for comparability. Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as of January 1, 2021, which have not been subsequently vacated, or disposed of. Acquired and disposed of properties are properties which were acquired, disposed of or classified as held for sale at any point subsequent to December 31, 2020. Properties with vacancy are properties that were fully vacant or had greater than 5.0% vacancy, based on square footage, at any point subsequent to January 1, 2021. 36 Table of Contents Operating Revenues For the three months ended September 30, (Dollars in Thousands) Lease Revenues 2022 2021 $ Change % Change Same Store Properties $ 28,706 $ 27,952 $ 754 2.7 % Acquired & Disposed Properties 6,858 2,286 4,572 200.0 % Properties with Vacancy 4,270 4,096 174 4.2 % $ 39,834 $ 34,334 $ 5,500 16.0 % For the nine months ended September 30, (Dollars in Thousands) Lease Revenues 2022 2021 $ Change % Change Same Store Properties $ 84,819 $ 84,658 $ 161 0.2 % Acquired & Disposed Properties 13,259 6,319 6,940 109.8 % Properties with Vacancy 13,686 11,404 2,282 20.0 % $ 111,764 $ 102,381 $ 9,383 9.2 % Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties increased for the three and nine months ended September 30, 2022, primarily due to income recognized from tenant funded improvement projects, where our tenants used their capital to improve our buildings, partially offset by a decrease in variable lease payments due to a decrease in property operating expenses, and a corresponding decrease in recovery revenue from property operating expenses. Lease revenues increased for acquired and disposed of properties for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, primarily due to accelerated rent from a lease termination relating to one property we sold, coupled with us acquiring 11 industrial properties during the nine months ended September 30, 2022, partially offset by a loss of revenues from three properties sold during the same period. Lease revenues increased for our properties with vacancy for the three and nine months ended September 30, 2022 due to vacant space being leased. Operating Expenses Depreciation and amortization expense increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, due to an increase in depreciation and amortization expense on the 11 industrial properties acquired during the nine months ended September 30, 2022, partially offset by a decrease in depreciation and amortization expense on the three properties sold during the same period. For the three months ended September 30, (Dollars in Thousands) Property Operating Expenses 2022 2021 $ Change % Change Same Store Properties $ 4,070 $ 4,202 $ (132) (3.1) % Acquired & Disposed Properties 466 478 (12) (2.5) % Properties with Vacancy 2,000 2,127 (127) (6.0) % $ 6,536 $ 6,807 $ (271) (4.0) % For the nine months ended September 30, (Dollars in Thousands) Property Operating Expenses 2022 2021 $ Change % Change Same Store Properties $ 12,373 $ 12,378 $ (5) — % Acquired & Disposed Properties 1,515 1,478 37 2.5 % Properties with Vacancy 6,230 6,422 (192) (3.0) % $ 20,118 $ 20,278 $ (160) (0.8) % Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The decrease in property operating expenses for same store properties for the three and nine months ended September 30, 2022, from the comparable 2021 period, is a result of 37 Table of Contents reduced real estate tax expense during the period, partially offset by general cost increases due to the inflationary environment during the three and nine months ended September 30, 2022. The decrease in property operating expenses for acquired and disposed of properties for the three months ended September 30, 2022, from the comparable 2021 period, is a result of a decrease in property operating expenses in relation to three property sales during the three months ended September 30, 2022. The increase in property operating expenses for acquired and disposed of properties for the nine months ended September 30, 2022, from the comparable 2021 period, is a result of an increase in property operating expenses for the 11 industrial properties acquired during the nine months ended September 30, 2022. The decrease in property operating expenses for properties with vacancy for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, is a result of reduced real estate tax expense during the period, partially offset by general cost increases due to the inflationary environment during the same period. The base management fee paid to the Adviser increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, due to an increase in Gross Tangible Real Estate over the three and nine months ended September 30, 2022 as compared to a smaller increase in Gross Tangible Real Estate during the three and nine months ended September 30, 2021. The calculation of the base management fee is described in detail above in “Advisory and Administration Agreements.” The incentive fee paid to the Adviser increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, due to a higher pre-incentive fee Core FFO. The increase in Core FFO is a result of an increase in operating revenues. The calculation of the incentive fee is described in detail above in “Advisory and Administration Agreements.” The administration fee paid to the Administrator increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, due to our Administrator incurring greater costs that are allocated to us. The calculation of the administration fee is described in detail above in “Advisory and Administration Agreements.” General and administrative expenses increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, primarily as a result of an increase in due diligence expenses for potential acquisition targets that were not completed, partially offset by a decrease in professional fees. We recorded an impairment charge during the three and nine months ended September 30, 2022 on two properties, as we had determined the carrying value of these properties was in excess of the fair market value, and not recoverable. Accordingly, we impaired these properties to fair market value. We did not record an impairment charge during the three and nine months ended September 30, 2021. Other Income and Expenses Interest expense increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021. This increase was primarily a result of increased interest costs on variable rate debt, as global interest rates have increased to counteract growing inflation, coupled with expensed deferred financing fees associated with mortgage repayments, and the Credit Facility amendment. We sold three non-core office properties during the three and nine months ended September 30, 2022, and as a result, incurred a gain on sale of real estate, net. Loss on sale of real estate, net, for the nine months ended September 30, 2021, is attributable to two non-core office assets located in Rancho Cordova, California and Champaign, Illinois, being sold during the period. Other income decreased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, primarily due to a cancelled sale fee we earned during the three and nine months ended September 30, 2021, coupled with income from a legal settlement. Net (Loss) Income (Attributable) Available to Common Stockholders and Non-controlling OP Unitholders Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders increased for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, primarily due to the increase in operating revenues due to asset acquisition activity during and subsequent to September 30, 2021, coupled with a gain on sale of real estate, net, from three non-core office property sales, partially offset by an increase in interest expense due to higher borrowing costs on variable rate debt due to global interest rate expansion. 38 Table of Contents Liquidity and Capital Resources Overview Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Credit Facility and issuing additional equity securities. Our available liquidity as of September 30, 2022, was $69.5 million, consisting of approximately $13.5 million in cash and cash equivalents and available borrowing capacity of $56.0 million under our Credit Facility. Our available borrowing capacity under the Credit Facility decreased to $35.5 million as of November 7, 2022. Future Capital Needs We actively seek conservative investments that are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial and office real property, make mortgage loans, or pay down outstanding borrowings under our Revolver. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, refinancing maturing debt and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. We also believe we will be able to refinance our mortgage debt as it matures. Additionally, to satisfy our short-term obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs. Equity Capital During the nine months ended September 30, 2022, we raised net proceeds of $40.6 million of common equity under our Common Stock ATM Program at a net weighted average per share price of $20.38. We used these proceeds to fund acquisitions, pay down outstanding debt and for other general corporate purposes. We did not sell any of our Series E Preferred Stock under our Series E Preferred Stock Sales Agreement during the nine months ended September 30, 2022. We raised net proceeds of $3.7 million from sales of our Series F Preferred Stock during the nine months ended September 30, 2022. As of November 7, 2022, we had the ability to raise up to $648.3 million of additional equity capital through the sale and issuance of securities that are registered under the 2020 Universal Shelf, in one or more future public offerings. Of the $648.3 million of available capacity under our 2020 Universal Shelf, approximately $26.5 million is reserved for additional sales under our Common Stock ATM Program, and approximately $621.3 million is res erved for the sale of our Series F Preferred Stock as of November 7, 2022. We expect to continue to use our Common Stock ATM Program as a source of liquidity for the remainder of 2022. Debt Capital As of September 30, 2022, we had 44 mortgage notes payable in the aggregate principal amount of $370.3 million, collateralized by a total of 50 properties with a remaining weighted average maturity of 4.4 years. The weighted-average interest rate on the mortgage notes payable as of September 30, 2022 was 4.19%. We continue to see banks and non-bank lenders willing to issue mortgages. Consequently, we are focused on obtaining mortgages through regional banks, non-bank lenders and the CMBS market. As of September 30, 2022, we had mortgage debt in the aggregate principal amount of $16.0 million payable during the remainder of 2022 and $66.1 million payable during 2023. The 2022 principal amount payable includes both amortizing principal payments and one balloon principal payments due during the remaining three months of 2022. We anticipate being able to refinance our mortgages that come due during 2022 and 2023 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities. In addition, we have raised substantial equity under our at-the-market programs and plan to continue to use these programs. 39 Table of Contents Operating Activities Net cash provided by operating activities during the nine months ended September 30, 2022, was $56.9 million, as compared to net cash provided by operating activities of $53.7 million for the nine months ended September 30, 2021. This change was primarily a result of an increase in operating revenues from our 11 industrial property acquisitions during the nine months ended September 30, 2022 , partially offset by an increase in interest expense due to higher interest rates on variable rate debt. The majority of cash from operating activities is generated from the lease revenues that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, Administration fees to our Administrator and other entity-level operating expenses. Investing Activities Net cash used in investing activities during the nine months ended September 30, 2022, was $75.5 million, which primarily consisted of 11 property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by the sale of three properties. Net cash used in investing activities during the nine months ended September 30, 2021, was $46.0 million, which primarily consisted of eight property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of two properties. Financing Activities Net cash provided in financing activities during the nine months ended September 30, 2022, was $23.1 million, which primarily consisted of the issuance of $45.2 million of common and preferred equity, coupled with a net increase in Credit Facility borrowings of $119.2 million, partially offset by the repayment of $138.9 million of outstanding mortgage debt, and distributions paid to common, senior common and preferred shareholders. Net cash used in financing activities for the nine months ended September 30, 2021, was $8.6 million, which primarily consisted of $14.3 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders, partially offset by $5.5 million in new mortgage borrowings coupled with the issuance of $130.0 million of equity. Credit Facility On July 2, 2019, we amended, extended and upsized our Credit Facility, expanding Term Loan A from $75.0 million to $160.0 million, and increasing our Revolver from $85.0 million to $100.0 million. Term Loan A has a maturity date of July 2, 2024, and the Revolver has a maturity date of July 2, 2023. The interest rate for the Credit Facility is equal to LIBOR plus a spread ranging from 125 to 215 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan A, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. The bank syndicate is comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association. On February 11, 2021, we added Term Loan B, a new $65.0 million term loan component to our Credit Facility. Term Loan B has a maturity date of February 11, 2026 and a LIBOR floor of 25 basis points plus a spread ranging from 140 to 225 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan B, which cap LIBOR from 1.50% to 1.75%. We incurred fees of approximately $0.5 million in connection with issuing Term Loan B. As of September 30, 2022, there was $60.0 million outstanding under Term Loan B, and we used all net proceeds to repay all outstanding borrowings on the Revolver. On August 18, 2022, we amended, extended and upsized our Credit Facility, increasing our Revolver from $100.0 million to $120.0 million (and its term to August 2026), adding the new $140.0 million Term Loan C, decreasing the principal balance of Term Loan B to $60.0 million and extending the maturity date of Term Loan A to August 2027. Term Loan C has a maturity date of February 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. On September 27, 2022 we further increased the Revolver to $125.0 million and the Term Loan C to $150.0 million, as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates from 3.15% to 3.75%. We incurred fees of approximately $4.2 million in connection with extending and upsizing our Credit Facility. As of September 30, 2022, there was $150.0 million outstanding under Term Loan C, and we used all net proceeds to repay all outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility’s current bank syndicate is comprised of KeyBank, Fifth Third Bank, The Huntington National Bank, Bank of America, Synovus Bank, United Bank, First Financial Bank, and S&T Bank. 40 Table of Contents As of September 30, 2022, there was $377.8 million outstanding under our Credit Facility at a weighted average interest rate of approximately 4.43% and $17.1 million outstanding under letters of credit at a weighted average interest rate of 1.75%. As of November 7, 2022, the maximum additional amount we could draw under the Credit Facility was $35.5 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2022. Contractual Obligations The following table reflects our material contractual obligations as of September 30, 2022 (in thousands): Payments Due by Period Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Debt Obligations (1) $ 748,041 $ 79,729 $ 56,036 $ 369,357 $ 242,919 Interest on Debt Obligations (2) 140,297 30,973 55,284 43,563 10,477 Operating Lease Obligations (3) 8,907 492 987 1,000 6,428 Purchase Obligations (4) 9,559 5,074 3,772 713 — $ 906,804 $ 116,268 $ 116,079 $ 414,633 $ 259,824 (1) Debt obligations represent borrowings under our Revolver, which represents $7.8 million of the debt obligation due in 2026, our Term Loan A, which represents $160.0 million of the debt obligation due in 2027, our Term Loan B, which represents $60.0 million of the debt obligation due in 2026, our Term Loan C, which represents $150.0 million of the debt obligation due in 2028 and mortgage notes payable that were outstanding as of September 30, 2022. This figure does not include $(0.1) million of premiums and (discounts), net and $6.2 million of deferred financing costs, net, which are reflected in mortgage notes payable, net and borrowings under Term Loan, net on the condensed consolidated balance sheets. (2) Interest on debt obligations includes estimated interest on borrowings under our Revolver and Term Loan and mortgage notes payable. The balance and interest rate on our Revolver, Term Loan A, Term Loan B and Term Loan C is variable; thus, the interest payment obligation calculated for purposes of this table was based upon rates and balances as of September 30, 2022. (3) Operating lease obligations represent the ground lease payments due on four of our properties. (4) Purchase obligations consist of tenant and capital improvements at 13 of our properties. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of September 30, 2022. Funds from Operations The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relevant non-GAAP supplemental measure of operating performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the same basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment losses on property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income. FFO should not be considered an alternative to net income as an indication of our performance or to cash flows from operations as a measure of liquidity or ability to make distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. FFO available to common stockholders is FFO adjusted to subtract distributions made to holders of preferred stock and senior common stock. We believe that net income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders. 41 Table of Contents Basic funds from operations per share (“Basic FFO per share”), and diluted funds from operations per share (“Diluted FFO per share”), is FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding and FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding on a diluted basis, respectively, during a period. We believe that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share (“EPS”), in evaluating net income available to common stockholders. In addition, because most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures when comparing us to other REITs. We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that Diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. We also present FFO available to our common stockholders and Non-controlling OP Unitholders as adjusted for comparability as an additional supplemental measure, as we believe it is more reflective of our core operating performance, and provides investors and analysts an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. FFO as adjusted for comparability is generally calculated as FFO available to common stockholders and Non-controlling OP Unitholders, excluding certain non-recurring and non-cash income and expense adjustments, which management believes are not reflective of the results within our operating real estate portfolio. The following table provides a reconciliation of our FFO available to common stockholders for the three and nine months ended September 30, 2022 and 2021, respectively, to the most directly comparable GAAP measure, net income available to common stockholders, and a computation of basic and diluted FFO per weighted average share of common stock: For the three months ended September 30, For the nine months ended September 30, (Dollars in Thousands, Except for Per Share Amounts) (Dollars in Thousands, Except for Per Share Amounts) 2022 2021 2022 2021 Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income $ 2,497 $ 4,498 $ 7,459 $ 6,657 Less: Distributions attributable to preferred and senior common stock (3,101) (3,038) (9,244) (9,105) Less: Series D preferred stock offering costs write off — — — (2,141) Less: Loss on extinguishment of Series F preferred stock — — (5) — Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (604) $ 1,460 $ (1,790) $ (4,589) Adjustments: Add: Real estate depreciation and amortization $ 15,764 $ 14,760 $ 45,672 $ 45,661 Add: Impairment charge 10,718 — 12,092 — Add: Loss on sale of real estate, net — — — 882 Less: Gain on sale of real estate, net (8,902) — (8,902) — FFO available to common stockholders and Non-controlling OP Unitholders - basic $ 16,976 $ 16,220 $ 47,072 $ 41,954 Weighted average common shares outstanding - basic 39,504,734 36,768,779 38,723,581 36,296,414 Weighted average Non-controlling OP Units outstanding 273,072 256,994 262,412 337,205 Total common shares and Non-controlling OP Units 39,777,806 37,025,773 38,985,993 36,633,619 Basic FFO per weighted average share of common stock and Non-controlling OP Unit $ 0.43 $ 0.44 $ 1.21 $ 1.15 Calculation of diluted FFO per share of common stock and Non-controlling OP Unit Net income $ 2,497 $ 4,498 $ 7,459 $ 6,657 Less: Distributions attributable to preferred and senior common stock (3,101) (3,038) (9,244) (9,105) Less: Series D preferred stock offering costs write off — — — (2,141) Less: Loss on extinguishment of Series F preferred stock — — (5) — Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (604) $ 1,460 $ (1,790) $ (4,589) Adjustments: Add: Real estate depreciation and amortization $ 15,764 $ 14,760 $ 45,672 $ 45,661 42 Table of Contents Add: Impairment charge 10,718 — 12,092 — Add: Income impact of assumed conversion of senior common stock 114 170 344 534 Add: Loss on sale of real estate, net — — — 882 Less: Gain on sale of real estate, net (8,902) — (8,902) — FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions $ 17,090 $ 16,390 $ 47,416 $ 42,488 Weighted average common shares outstanding - basic 39,504,734 36,768,779 38,723,581 36,296,414 Weighted average Non-controlling OP Units outstanding 273,072 256,994 262,412 337,205 Effect of convertible senior common stock 363,246 532,785 363,246 532,785 Weighted average common shares and Non-controlling OP Units outstanding - diluted 40,141,052 37,558,558 39,349,239 37,166,404 Diluted FFO per weighted average share of common stock and Non-controlling OP Unit $ 0.43 $ 0.44 $ 1.21 $ 1.14 Calculation of diluted FFO per share of common stock and Non-controlling OP Unit, as adjusted for comparability FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions $ 17,090 $ 16,390 $ 47,416 $ 42,488 Add: Series D preferred stock offering costs write off — — — 2,141 FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions, as adjusted for comparability $ 17,090 $ 16,390 $ 47,416 $ 44,629 Weighted average common shares and Non-controlling OP Units outstanding - diluted 40,141,052 37,558,558 39,349,239 37,166,404 Diluted FFO per weighted average share of common stock and Non-controlling OP Unit, as adjusted for comparability $ 0.43 $ 0.44 $ 1.21 $ 1.20 Distributions declared per share of common stock and Non-controlling OP Unit $ 0.37620 $ 0.37545 $ 1.12860 $ 1.12635 43 Table of Contents